Budgeting

In simple words, budget is essentially an estimation of future expenditures and income for a fixed period of time (usually budgets are prepared on monthly basis). However, this simple practice of budgeting can make huge differences in the overall effectiveness and profitability of businesses. No matter how small a business, one must set down a budget, which is the primary tool to judge your financial worth and standing in the future. In absence of a budget, you will never be able to gauge and improve the profitability of your business.

Let's read about different types of budgets in detail.

Start Up Budgets:

If you're going to start a business, first thing you should be doing is to come up with some rough estimations, laying down all sorts of expenditures that includes company registration, licensing, purchasing equipment, hiring staff, overhead and advertising expenses, along with the estimated sales. Subtracting expenditures from the sales will give you an idea if the business is feasible or not. You can try to cut down some expenditure or increase per-unit-prices (when possible) to make it more profitable. Remember that a common mistake many start ups make is putting unrealistic numbers in sales section, which means the budget will show a very promising picture. Therefore, a start up budget must contain an explanation of how one has derived the expected number of sales and other figures.

Monthly Business Budgeting:

Once the business is launched, it requires budgeting on regular basis (usually monthly, quarterly or yearly). There are numerous methods for preparation, the most traditional being the budget preparation by finance department (with the help of input generated by other departments like marketing department, IT department or Manufacturing Department). There are many techniques used for business budgeting, for example capital budgeting (using overall investments & assets) or cash budgeting (that focuses on cash-flows). Similarly, large corporations can have different budgets for different departments as well, such as production budget, marketing budget or research & development budget. One must remember that preparing budget is not the only thing that a business needs to do. One must keep comparing real costs and profits to the estimated figures and make corrective changes (if the real figures are diverging from the estimated ones).

Personal Budget:

Benefits of budgeting are not limited to businesses and individuals or households can benefit as well. Personal budget is a monthly plan that distributes the overall income towards short term expenditures with the target of saving for long term financial plans. However, personal budgets should not employ complex budgeting techniques.